JERUSALEM - It started out as a family feud. But a small-time computer break-in has erupted into Israel's biggest business scandal in decades, reaching into some of the country's powerful corporate suites and jolting the cozy world of the industrial elite.

( An unidentified lawyer, right, speaks with private investigators Zvika Krochmal, second right, and Ofer Fried, second left who were both arrested as part of a police investigation of a computer espionage scandal )

Top Israeli blue chip companies, including a high-tech giant that trades in New York, are suspected of using illicit surveillance software to steal information from their rivals and enemies.

The list of victims is equally impressive, ranging from a cigarette importer to the local operations of the Ace hardware chain and Hewlett-Packard Co. Even a well-known TV entertainment reporter is caught up in the affair, claiming hackers invaded his computer to get phone numbers of celebrities.

The investigation has shed an unflattering light on the Israeli business world, where cutthroat competition in a small market, high-tech sophistication and the secretive traditions of the army form a volatile mix.

The case is also attracting the attention of top security software makers. Software firms in the U.S. have been updating their products to defend against similar outbreaks.

Sever Plocker, a leading Israeli economic commentator, said the scandal could have "unpleasant consequences" for foreign investment.